Asian asset managers increase their passive capabilities, reports Cerulli

Mar 28th, 2017 | By | Category: ETF and Index News

Global analytics firm Cerulli Associates has reported that an increasing number of Asian asset managers are ramping up their passive capabilities, including providing greater access to strategic beta strategies. The findings are supportive of further growth in the region’s ETF industry.

Active asset managers are building passive capabilities in Asia, reports Ceruli

Analysis from Cerulli finds that the commission fee structure in Asian markets is a genuine obstacle to the spread of passive investing in the region.

The report found the trend towards greater passive exposures is being driven by increasing regulatory scrutiny on fees and the rise of online distribution, including robo-advisory, which is further powering the proliferation of low-cost investing.

However, the report found that some product managers are not in favour of passive management and that their arguments against typically rest on two concerns. Firstly, due to less efficient equity markets in Asia, many believe greater alpha can be generated compared to developed markets. Secondly, Asia’s mostly commission driven model hampers the popularity of passives, which offer little or no sales incentives.

In response to the critics first argument, Cerulli’s findings reveal that active funds investing in Asia Pacific ex-Japan and global emerging markets have in fact delivered little or no alpha over various time periods.

As for the second argument, Cerulli agrees with providers that distribution has been a key hurdle for passive funds, which are still much smaller than their active cousins in terms of size and flow. In addition, demand for passives varies across markets – apart from Japan and Australia, China was the only market which captured a double-digit share of passive assets under management last year, with the Southeast Asian markets commanding a miniscule share of assets.

Anecdotal feedback contained in the report suggests passive investing in most Asian markets are primarily being driven by institutional investors. A clear example is the Bank of Japan, which has been buying ETFs as part of its quantitative easing program to spur the domestic economy. This in turn has increased interest from retail investors. In addition, the growth of leveraged and inverse ETFs in the region has gathered significant momentum with regulators in Hong Kong and Singapore having recently removed barriers to entry.

Cerulli notes that in the long run and across Asian markets, passive product development and demand will likely continue to rely on regulatory and institutional initiatives.

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